For Firms Working Within an ESG Framework, What is the Immediate Outlook for the Future
By PHILLIP ROSS, CPA, CGMA, PARTNER
In 2004, a major report entitled “Who Cares Wins” was issued from the United Nations to encourage all stakeholders in business to consider and adhere to ESG standards referring to Environmental, Social and Governance.
The Environmental encourages policies that are environmentally sustainable and minimize harm to the climate or immediate environment. Social pertains to diversity, equity and inclusion and other relationships with suppliers and surrounding communities where companies operate. Governance pertains to issues in executive pay, shareholder rights, leadership and other internal controls.
ESG was originally looked upon as a solution for establishing more fair practices in which the idea of measurable goals for each component was introduced. Today, with all good intentions, ESG still lacks a consistent framework and standardization for quantifying
and measuring each component. Although industry wide standards are non-existent at this point, compliance is still imminent and companies have begun the process.
To date, some 58% of companies in America’s S&P 500 index at least publish a sustainability report, up from 37% in 2011. More and more, ESG is taking center stage across many industries in the built world, including construction contractors.
As commercial buildings have been cited as responsible for nearly 40% of all total carbon emissions, contractors and others involved in construction will need to decide upon a framework for reporting of these new standards that include more sustainable practices at the core.
Previously, new regulations around LEED certification and WELL buildings have been a first step in raising the bar in energy efficiency and more sustainable operating practices, but this is just scratching the surface. Greater levels of transparency and reporting standards will become more requisite for every aspect of a business in the future where construction contractors will not be exempt and will need to develop business models and create project delivery strategies with ESG goals in mind.
Carrying through on implementing ESG initiatives and getting the reporting right is a challenge for all businesses today. ESG in construction will have its own challenges as we make decisions on measurable frameworks to be developed for the total impact made by firms on their surroundings, their employees and other stakeholders. This includes labor and hiring practices, the use of sustainable materials, supply chain procurement, and even the social impact we have on the communities where we operate.
Environmental impact will be a large consideration given that construction activity is a large consumer of natural resources and raw materials. Construction industries will become increasingly more proactive in replacing emissions-intensive and non-renewable materials with more environmentally friendly choices that present a lower carbon footprint. Alternative materials will be sought after to create a closer net-zero built environment, while balancing that with the durability and strength provided by traditional materials such as cement and steel, which reportedly create 8%-9% of global emissions. For example, Mass Timber, which has a negative carbon impact, is currently being used in lieu of traditional building products in certain circumstances when feasible, as there are limits when compared with the strength and durability of concrete and steel.
Social considerations will include diversity, equity and inclusion, or DE&I. These initiatives will include programs and mission statements that strive to include people from more diverse backgrounds that include differences in socio-economic upbringing, race, ethnicity, religion and gender, for example. Other social considerations will include education and career development pathways, health and support to ensure well-being, as well as the importance of making meaningful impact in the community.
Governance will include area in practice strategy, policy, ethics, stakeholder engagement and supply chain management. Altogether, contractors, architecture and engineering firms and all involved in the real estate development cycle will embark on the planning and commitments necessary to bring each of the aforementioned areas into a framework for ESG standards and reporting.
ESG Reporting Will Include the Paradox of Combining Quantitative, Subjective Data
It’s also true that ESG in construction will bridge both financial and non-financial data, requiring seamless methodologies and technology solutions to keep accurate records and provide decision makers, board members and other stakeholders with a holistic view of the firm’s ESG framework, including all environmental, social and governance factors.
ESG going forward will act to forge operations in construction firms and their affiliates. ESG will come with new challenges for the industry as the industry sets out to define measurable frameworks for reporting. These reporting challenges will be accentuated as they arrive on the heels of current concerns in the industry, such as economic slowdowns, and rising interest rates, among others. Altogether, the new standards will require detailed reporting and a clear strategy for achieving goals in ESG at a time when post-pandemic challenges remain and linger for those in the business of construction.
About the author: Phillip Ross, CPA, CGMA is an accounting and audit partner and chair of the Construction Industry Group at Anchin, Block & Anchin, LLP. For more construction industry thought leadership and content, log on to www.anchin.com.